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What are Distressed Properties?
What are Distressed Properties?
Written by Nyra Smith
Updated over a week ago

A distressed property is any property which is either in the early stages of default with the lender, has been listed as a short sale, or is in an active state of foreclosure sale such as trustee or bank-owned auctions. In this article, we will cover a brief overview of each distressed property type, as well as the risks and benefits associated with their purchase.

The Various Types of Distressed Properties

1. Short Sale:

Properties offered through “short sale” are typically in the earlier stages of delinquency where a borrower was unable to modify their loan yet still wishes to avoid foreclosure proceedings. Often these properties are offered at or less than what is owed, which could represent a potential financial opportunity for a prospective purchaser. 

Homeowners looking to request a short sale to their lender need to provide evidence that they do not have the means to repay their home loan. A lender then reviews the application from the owner, sends out an appraiser, and ultimately provides a verdict on the request.

Since the situations surrounding short sales can vary greatly, there are several different types of short sale options available to owners, such as Traditional Hardship, Strategic, and others which vary by lender. Lenders can choose to pre-approve a short sale purchase price in order to cut down on the timelines often associated with traditional short sales. 

Those looking to purchase a short sale may face longer purchase timetables as there is more paperwork involved and lenders may get directly involved to negotiate a price. In addition, the property may require significant repairs so it’s recommended to hire a home inspection professional to examine the property before closing on it.

Even with these challenges in mind, the motivation from the seller to get out from under the loan and typically lower competition for these properties, many investors continue to lookout for short sale opportunities.

2. Pre-Foreclosure:

As soon as a lender files a Notice of Default (NoD), a property shifts into a “pre-foreclosure” stage. This happens after a homeowner or borrower fails to make their mortgage payments for an extended period of time, typically around three to six months. The NoD serves to advise all parties that the lender intends to pursue a foreclosure sale if the mortgage note is not brought current.

Investors are often on the lookout for pre-foreclosure homes because as there is an opportunity to make an offer before the property hits the market. While some owners will work towards curing the default, others will be open to selling the property before the delinquency moves into foreclosure proceedings.

3. Foreclosure Sale:

The foreclosure proceedings officially begin once a Notice of Sale (NoS) is posted at the property and advertised locally; in the event of a judicial foreclosure, a lis pendens is used in place of an NoS. Commonly known as Trustee or TPS sales, foreclosures typically take place in a public venue such as the county courthouse near where the property is located. During the TPS sale, the property is auctioned and sold to the highest bidder if/when the set reserve or “credit bid” is met. If this reserve is not met, the property is not sold and ownership of the property will revert to the beneficiary (usually the bank).

If the reserve is met and the property sold, the winning bidder pays for the property via a cashier’s check and in return receives either a Trustee’s Deed Upon Sale or a Sheriff’s Deed, depending on whether the foreclosure is nonjudicial or judicial. The winning bidder assumes all risk regarding liens associated with the property.

4. Bank-Owned (REO): 

In the event that a property does not sell at the foreclosure sale, ownership reverts back to the lender and becomes part of their “Real Estate Owned”, or REO, portfolio. At this point, some lenders will try to sell their bank-owned properties as soon as possible, while others will invest in varying degrees of repairs to improve the property prior to selling.

Since these properties are owned by the bank, they are typically free of all outstanding taxes and liens. Combined with the relatively low prices usually offered, these considerations make REO properties attractive for many homebuyers. As such, bidding over these properties can be competitive. 

Since banks sell REO properties “as-is”, they may in some cases require extensive repairs. 

Browsing local papers is no longer the preferred way that buyers find distressed properties for sale. If you’re wondering how to find distressed properties, look no further than our easy-to-use Property Search Feature.

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